One of the first things I tell new traders is to never trade on emotions. Emotions are killers but it’s not always easy to spot them at the start of your trading career. Sometimes we all become emotional when trading.
Some of the biggest killers of inexperienced traders is trading on emotions. It’s not just losing trades that cause these kinds of emotional problems. Sometimes it’s winning trades that cause similar problems. Sometimes it’s winning trades that cause winning trades; however, when losing trades occur, it’s not uncommon to see traders become fearful in the face of losing trades (as opposed to elated on winning trades).
What causes this sudden emotional change?
The root cause of this sudden emotional change is fear and greed. Fear can cause a change in perspective which can manifest as the trader becoming fearful of losses. Greed is a different story. Fear begets greed and greed begets fear.
Fear begets greed. The natural response to fear is to become greedy. As a trader, you are more inclined to place a greater emphasis on your previous winning trades, rather than those you’ve lost. After all, who wants to lose more than you?
In trading, we are not in control of our own trading results-we’re relying on the skill of our professional trading advisors to work in our best interest (which we do not fully understand). It’s natural then that we look at our results and say, “how smart I am.” We want to become more intelligent as traders. When this fear and greed starts to take hold, we are more inclined to place greater emphasis on our winning trades, rather than our losses.
In this regard, losing trades can cause similar emotional problems as wins. After all, we know we should avoid placing too much emphasis on losses. When this fear and greed start to occur in our trading results, we become even more greedy. We want to put forth our best effort into our winning trades.
And so the cycle continues, with our fear and greed taking centre stage in our trading results. We become more fearful of losing trades, more greedy when winning trades occur, and more fearful when the market continues to remain range-bound.